The coming increase of Temporary Graduate visas

I mentioned briefly in my previous post that the Department of Immigration and Border Protection recently published a prediction for the number of “temporary graduates” over the coming years. From a recent discussion paper (page 26):

The subclass 485 has been credited with the strong growth within the Higher Education sector with internal modelling predicting that subclass 485 visa holders could potentially exceed 200,000 by the 2017-18 programme year.

There are a few caveats in that paragraph. Despite this, it is a nugget of information with significant ramifications for Australia’s migration framework. I’m therefore unsure why this information is in the middle of a paper on deregulation and not more prominently highlighted by any of the Department of Immigration, the Department of Education or the Department of Employment.

Regardless, why is this a big deal?

The subclass 485 visa – Temporary Graduate – is not new. Designed to give international students in Australia work experience in the labour market, the visa used to have a range of complicated eligibility criteria. This kept numbers of temporary graduates low relative to the total number of international students. Here is the last five years:

Screen Shot 2015-04-07 at 10.02.33 pm

(Source: Temporary Entrants and New Zealand Citizens in Australia – Stock – September 2014)

Topping out at just over 40,000 in 2013, the visa has been in decline since then. Compared to the ~350,000 international students currently in Australia, this is not a major visa category.

However all of this is about to rapidly change. Owing to policy change introduced by the Knight Review of 2011 under the Gillard government, the complicated eligibility criteria for a temporary graduate visa have been largely abolished. If your first student visa was granted after November 2011 and you went to a university to complete a two year qualification, you are likely eligible for at least a two year work visa. No strings attached. No employer required.

Given student visa applications since 2013 have been increasing, this change is slowly flowing through the system with the Department of Immigration predicting 200,000 visas by 2017-18 (I’m unsure if this prediction is for the population of visa holders at the time or the number granted per year). As there are currently ~20,000 temporary graduates in Australia, this would be a 10-fold increase in a three year period. When combined with the concurrent increase in student visa holders, it is likely there will be between 650,000 and 750,000 international students or recently qualified international students in Australia by 2017-18. This is not a small number.

I’ll be clear. I support the intention behind this visa. Giving international students an opportunity to gain skills in the labour market is good for the students themselves, the global competitiveness of Australia’s higher education sector and, over the long-term, the Australian labour market and Australian workers. Further, this will become the norm internationally with regard to student visa policy.

However the timing couldn’t be worse. There are two factors. Unemployment is slowly increasing and the number of recent university graduates is climbing rapidly due to the expansion of the sector under the previous government. This environment means the onus is on policy makers to ensure the transition to a larger temporary graduate population is as smooth as possible. Higher education institutions have a major role to play also. The private benefit of increased global competitiveness they obtain for zero cost means they must become more adept at dealing with international students. In particular, pastoral care and a focus on English proficiency should priority areas for improvement.

Those 200,000 people are already in the system and highly likely to materialise. The future trend may be different but the short-term outlook is fixed. The question now is what to do about it.

With any large policy change like this, there needs to be institutional support in place. How will international students make the transition from university to the labour market? Are employers aware of this visa and prepared to employ temporary visa holders without future certainty? What structures are in place to prevent systematic exploitation of a somewhat vulnerable population? What happens to those who want to stay in Australia but fail to receive a visa after their temporary graduate visa expires?

These are not minor questions and the answers will go a long way to either bedding down this new policy direction or threaten a major negative disruption to Australia’s migration framework. I hope someone, somewhere is working hard on these matters. In my opinion, this is the most likely migration policy area to flare up in a deteriorating labour market.

Are international students immigrants?

The British immigration debate is turning up some interesting pieces of public opinion. A recent poll found a majority of respondents did not want the government to cut-back on the number of overseas students. However the more interesting finding better highlights the crux of the issue:

“Christopher Snowden, UUK president, said: “The poll is clear that the public sees international students as valuable, temporary visitors, not immigrants.”

The British public might not view international students as immigrants. I wonder how international students view themselves?

There is a clear link between young people using overseas education to obtain residency elsewhere. In Australia, we have some experience of this. In the 2000s, extremely lax regulations generated a pathway from a student visa to a permanent skilled visa and Australian residency. This created a “bubble” in the industry of international education provision. This bubble filled with quick, unsustainable growth and subsequently popped when the rules were changed:

Student visa applications lodged, rolling 12 month average (June 2006 – June 2011)

Student visas

Other factors were also at play. High profile violence against Indian students in Melbourne is one example. However the link between permanent residency and student visas was an important consideration for many international students.

This has been recognised by policy-makers. The competition amongst education providers to attract overseas students is not limited to Australia. The United States, Canada and many countries in Europe seek to attract overseas students. These students pay large fees, rent or buy houses and spend money in local economies. All without access to government safety nets.

In choosing which country to live in and which education provider to attend, a value is placed on recourse to future residency. In Australia, this has led directly to the creation of post-study work visas, allowing international students between two and four years to work (without restrictions) in Australia. Any explicit reference to “temporary visitors, not immigrants” in Australia should now be ignored as the policy environment is much more complicated. While the visas still restrict access to permanent residency, the combination of a student visa and a work visa provides for six to nine years of valid residency.

As more potential students learn of these work visas, it will assist Australian education providers “win” the global competition for overseas students given this is an advantage not enjoyed by American or English universities.

Perhaps societies cannot have it both ways. Attracting international students may require additional acceptance that some, even a majority, of these students will stay on and work in countries where they studied. In Australia, despite specifically acknowledging this link through post-study work visas and past policy mistakes, the public at large probably does not understand international students as migrants and opinion is likely similar to British attitudes in the poll.

To me, the British poll highlights this contradiction neatly. Groups who support immigration, such as Mr Snowdon and the UUK, use the poll to promote more access for overseas students on the very premise these people are not immigrants but visitors. This stance may further immigration goals in the short-term but will inevitably lead to confusion over the long-term when it turns out this is not the case at all. Perhaps ironically, groups who oppose immigration normally understand the connection between education and residency and campaign against it.

It’s easy to look past the consequences of rhetoric and public opinion in the short-term to gain policy reform but immigration advocates would do well to also consider the gaps between how the public views immigration and how immigrants view themselves. These gaps are the policy battles of the future and once a migrant has arrived with a preference to stay, it is extremely hard to walk to tough road of forced deportations. This forces the hand of governments and in increasingly populist political environments, this can have nasty consequences.

A lesson from the British international student ‘debate’

Last week I wrote about higher education and student fees. However university funding is a multidimensional beast. I feel it would be remiss not to touch on another major revenue stream for Australian universities: international students.

Here is some perspective.  In the United Kingdom, there were a total of 425,265 international students (EU and non-EU) in higher education in 2012-13. In the United States, the total was 819,644 for the same period.

In the U.S. this is equivalent to 4 per cent of all enrolments while in the U.K. about ~25 per cent.

In Australia, in September 2013, there were 346,965 international students currently in the country (June and December skew on the stock stats because people travel in holidays). This is equivalent to about 32 per cent of all enrolments (however, one should note ‘higher education’ is a broad term). Higher education in Australia is particularly of interest to Asian international students. About 90,000 Chinese students are in Australia compared to a tick over 200,000 in the U.S. Given the vast size difference between the two higher education sectors, this is rather incredible. Perhaps I’ve been drinking the kool-aid, but I see this as a major positive for Australia in the coming decades.

Moving onto income. The money generated from international students is substantial. In 2012-13, this was the 4th largest ‘export’ worth $14.4bn.

When you flesh this out a bit, there are several consequences.

While about 30 per cent of my undergraduate university education was financed by a loan I’ll pay back, the other 70 per cent was kicked in by government. The total cost to me was about $14,000. Yet, for an international student to take exactly the same degree, the costs were about (this is from memory) $55,000 (the same course now costs approximately $78,000). This is despite, presumably, costing exactly the same to teach myself and a randomly selected international student. This fee difference shrinks when discussing post-graduate education but there is still some gap.

This is effectively the subsidisation of higher education for Australians by international students. I don’t see this as a negative outcome, just something to be noted in any discussion about the structure of higher education funding in Australia.

But with this subsidisation comes important considerations. For instance, in the U.K. this year, for the first time in 29 years, there was a drop in the number of international students. In Australia, we’ve experienced out own downturn in students from the highs of 2007-09 and the panic induced to the entire higher education system because this downturn was a cost.

This comes back to a key foundation of migration. Its hardly static. The flow of people, students in this case, responds to many things; the quality of institutions, the quality of other institutions, fees, migration policy and the exchange rate as well other, less tangible effects such as culture and the reception of international students in communities where they study. This last impact was felt heavily after several cases of violence against Indian students in 2009 in Melbourne. It is impossible to untangle the precise impact this had, but I believe it was widely felt, with enrolments dropping off given the broad exposure the incidents received in Indian media.

This dynamic nature of migration should not be forgotten by higher education policy makers and those who care for university budgets. The counter-factual of a substantial reduction in the number of international students in Australia is a massive hit on the higher education budget and likely a large increase in the fees for domestic students.

Britain is currently showing Australian policy makers in this field exactly what a fiasco this can turn into via the Cameron government’s crusade against immigration and the attrition of international students in the process. Before any big decisions are made about higher education in Australia, various environments for international students should be seriously considered as we know change can happen quickly.

Why your HELP debt is progressive and how to keep it that way (with added estate tax)

I’m not sure I agree. But it begs the question what is progressive? I’m not very good on the big questions, so I’ll focus on something in the news this week.

I always thought free university education was a solid progressive cause. But if you look at the structure of the labour market, you can make a sound case this isn’t true and certainly wasn’t when HECS was introduced in the late 1980s.

Basically, if you go to university, you’ll (on average) earn additional money over your career from this activity despite giving up income to attend. While you will pay higher income taxes and while you could also argue education is a public good, there is definitely individual gain from university, in the form of greater income.

Now, if most people don’t go to university and its free, this is regressive as poorer people end up paying for richer people. Those that go to university accrue a private benefit funded by the government. Another way to look at this is to ask why university should be free? You might persuade me if the public good argument – higher education making everyone better off – was strong enough, but I don’t think current evidence supports this.

Simply put, there are too many people who don’t attend university to allow it to be free. From a cost perspective, that sounds silly but from an equity perspective, it is important. Perhaps many years into the future, the vast majority of people will receive some form of higher education, meaning the argument to provide it for free to will stronger. Until then, some form of student payment strikes me as a progressive policy response to university funding given the current benefit of university to the individual.

The current system – HELP funding – means university students pay about 30 per cent of their way through a deferred, interest-free loan. The other 70 per cent is government funded. The 30 per cent student fee is likely the best loan one will ever receive. Payments are only due above a threshold (currently above $50,000) and the debt only increases in line with inflation.

I’m going to assume the current system is broadly supported, with a minority on the left arguing for full-government funding of university education and a minority on the right arguing for privately funded university education. Therefore we should be debating the best way to ensure the current system is both equitable and efficient.

Helpfully, on Sunday the Grattan Institute released a report on higher education, calling for HELP reform. This is to derive more income from former students, lowering the level of student debt the government holds:

The Commonwealth Government could save more than $800 million a year by 2017 if it recovers outstanding student loans from deceased estates and people living overseas.

Total doubtful debt – loans that are not expected to be repaid – is likely to be as high as $13 billion by 2017. The Higher Education Loan Program (HELP) lends students more than $6 billion a year to finance their education, as much as the Government spends on funding higher education tuition.

This is exactly the kind of discussion we ought to be having about higher education student fees.

The main point of the report is that the $800m per year could be better spent supporting more teaching and research, than being accrued as ‘bad’ government debt. The greater the percentage of ‘bad debt’, the less sustainable current policy is. I think the two solutions promoted – recouping debt from estate taxes and overseas repayments – are both valid and should be pursued on the proviso the cost to administer such collection is not exorbitant.* Obviously there is the risk a government will seek to raise more revenue from these measures and simply sit on it, arguing Australia can’t afford more resources for teaching and research. This requires a strong counter-argument from higher education advocates.

I see the HELP system as extremely effective. It allows people to attend university without paying up-front fees and has expanded the number of people attending. Andrew Dempster says since the introduction of HECS/HELP “the proportion of young Australians who hold bachelor degrees has increased from an anaemic 12.1 per cent to an impressive 36.8 per cent”.

You don’t need to mortgage your future to attend university in Australia, unlike the U.S. Keeping this policy environment sustainable will allow this to continue long into the future. If “progressive” policy makers are wary of these reform ideas to limit bad debt, perhaps they can be coupled with an expanded youth allowance system, where the incentive to work while at university is slightly discouraged by providing some income in the form of a deferred loan, incorporated into the HELP system. This may better assist students from low-income households to engage and prosper at university.

(Sidenote: the Grattan report also looks at “securitising” government held HELP debt – Appendix 3 – and doesn’t think much of it. When you can’t convince Andrew Norton on a question of funding efficiency, you’re probably doing it wrong)

Finally, a comment to those who argue this generation of politicians got their education for free and are now charging everyone else, naming plans such as this as ‘grave robbing’. This is a ridiculous argument. Times change, its called progress. The realities of university funding reform have allowed literally hundreds of thousands of low-income people to attend university who otherwise wouldn’t have been able to. HECS, now HELP, is a good, solid, progressive policy. It’s not perfect, but instead of snarky comments, think about the consequences and provide something more than outrage.

Away from policy for university funding, the report raises an interesting question about the intersection between estates and government revenue. An estate tax raises government revenue by taking a fixed proportion of a deceased person’s estate. Australia abolished this tax in 1979. Wikipedia helpfully notes stamp duty will kick in when assets are transferred one person to another, however forgets to mention this is typically exempted in relation to estates. Even the U.S., the bastion of individual liberty, has a form of estate tax, as does France, Germany and the United Kingdom (see this helpful EY report, designed to minimise tax payments, for a primer on different countries).

I see no reason for this not to be a part of a progressive tax framework in Australia. Here are comments from the Henry Review on estate-type taxes (H/T Matt Cowgill):

A bequest tax would be a relatively efficient means of taxing savings. Decisions to save taken solely to fund consumption later in life would be unaffected. But decisions to save motivated by the desire to leave a bequest would be affected and this would impose some efficiency costs. In aggregate, though, bequest taxes are not likely to introduce large biases into donor behaviour. A bequest tax could increase labour supply and savings by recipients and prospective recipients, though the effects would be limited.

Such a tax could also be a progressive element of the tax and transfer system. Because the distribution of wealth in Australia is so uneven, most of the revenue available from a bequest tax could be raised from the top 10 per cent of households by wealth.

The key point is the distribution of wealth being so uneven. I believe income taxes were reduced too far in 2006-08 however there are clear behavioural impacts on income taxes above certain thresholds. An estate tax is both relatively efficient and highly equitable. A win-win argument for a progressive policy tweak in our tax framework. It’s not going to raise tens of billions of dollars, but it will assist at the margins and could stave off a less progressive tax change.

If the Grattan Institute can recommend something akin to an estate-type payment in relation to higher education, surely there exists the basis for renewed interest in a limited proposal for a progressive estate tax in Australia. An argument centred around a boost to government revenues while putting a slight dent wealth inequality in Australia should try and carve out a level of support in the electorate.

* There is a third solution outlined – revising the threshold indexation from AWOTE to CPI – designed to captured more people in the threshold over time. I disagree with this as I err on the higher side of the income threshold and the ability to repay debt.However this solution is relatively small in terms of capturing additional debt repayments.